The Pensions Policy Institute (PPI) has published a report called ‘What can other countries teach the UK about measuring Value for Money in pension schemes?’ which provides an international perspective to the current UK debate around the definition of Value for Money (VFM) in pensions.
The report reviews recent developments in five countries: New Zealand, The Netherlands, Australia, Sweden, the US and considers how these might relate to a UK VFM framework. The report found several key messages from those countries relevant to the UK’s defined contribution (DC) practice and policy.
According to the report, a clear statement of and agreement on the outcomes sought in assessing VFM have required preconditions for effecting positive change, with outcomes expressed from members’ perspectives as things they value.
The Swedish PPM (Premiumpensionsmyndigheten – or Premium Pension Authority) experience demonstrates that despite the detailed work of the Swedish parliamentary review, reforms to enable better choices in the funds marketplace have yet to be implemented due to a lack of consensus. New Zealand gained greater consensus following their review of member behaviour in the use of default strategies, which resulted in an agreement between the government, regulator, and schemes to begin better targeting investment strategies with the goal of long-term investment. The Australian example also demonstrates policy clarity through performance testing and sanctions interventions for Super funds.
The report also says that it is possible to drive a more effective tendering process for these services to secure VFM by establishing clear, measurable, and comparative standards and benchmarks for performance in the key areas of delivery, investment, administration, and engagement.
The re-tendering process for default Kiwisaver providers demonstrates how clearly defining outcomes, such as consumer engagement, can ensure that they are delivered as part of an overall VFM assessment. The New Zealand Ministry of Business, Innovation and Employment (MBIE) can now drive engagement action through the chosen default providers to facilitate better member choice as an integral part of the VFM outcome by incorporating engagement metrics into the specification of performance standards.
In addition, all of the country case studies demonstrate the importance of comparative data as the foundation for policy formulation, governance, and member engagement when designing and implementing VFM measures in their own ways.
In New Zealand, comparative scheme data on returns, charges and service is used to drive the Commission for Financial Capability’s Kiwisaver fund finder selection tool for members. In Australia, benchmarked performance testing is underpinned by reliable data, which gives the regulator the authority to sanction underperforming products and enables members to select better MySuper solutions. In the Netherlands, the Dutch National Bank’s extensive database of scheme data has enabled detailed analysis of costs that reveals the impact of scale changes and consolidation on investment and administration costs.
In Sweden, comparative data is used to demonstrate the impact of engagement activity and the outcomes achieved in the Swedish PPM system. In contrast, in the United States, data issues both impede policy research on target-date funds and result in market-based alternatives that are not publicly available.
The report says that there are barriers to members exercising informed choice, so where choice is provided, it is unlikely to result in good outcomes unless the options are carefully designed and edited.
The experience of funds leakage in the United States and the Swedish example of continued investment in potentially fraudulent funds demonstrate that relying on member choice to deliver VFM is unlikely to result in consistently good results. The PPM funds market investment proposals recognise the importance of limiting choice to quality-tested options and structuring choice to guide members to the best options for their needs. This approach is also evident in the New Zealand fund finder tool, which guides members through an interactive selection of options from an appropriately edited set of options. Another example of a policy intervention designed to enable more effective member choice is the new Australian requirement for ‘failing’ funds to write to their members and direct them to a tool to select a better performing fund.
The report also found that positively scaling up impacts costs, but diminishing returns will occur. The experience in the Netherlands suggests that, while the lower cost and higher returns of larger funds have a small positive impact on VFM, the effect is of low order. Once a scale of £0.5 bn is reached, the scale on reduced charges becomes negligible. This conclusion is supported by the US experience, where the largest VFM gains are available to the smallest schemes and significant charge reductions plateau around £370m. A reliance on scale effects to improve outcomes, at least for those with low to median incomes, may be misguided because the impact on VFM is marginal.